A ruling that the liaison office of home furnishing multinational Ikea is not liable to pay income tax in India could set an important precedent and benefit for foreign retailers, which have set up similar operations to oversee sourcing of goods from India.

In a recent decision, the Authority for Advance Rulings (AAR) said that the liaison office of Ikea Trading (Hong Kong) does not earn any income in India because its activities are confined to the purchase of goods that are exported by Indian vendors to the company or its nominees.

Ikea does not effect any sales in India and, thus, no income accrues or arises in India, AAR said in its ruling on an application by Ikea Hong Kong. While an advance ruling is binding only on the applicant and the tax department, it has persuasive value as other taxpayers can cite it in similar subsequent cases.

The income tax department wanted Ikea Hong Kong to be treated as an intermediate entity that earns revenue for the services provided by the Indian office. Such treatment would have created a taxable presence.

However, the advance rulings body was of the view that even though exports were made by the Indian seller, the goods purchased by Ikea Hong Kong through its liaison office were meant to be exported.

The liaison office carries out price surveys of potential suppliers, does quality checks, social audits of suppliers and collects samples for the Hong-Kong-based parent.

A separate Ikea group company in India buys and sells products and earns income from exports, mainly to other Ikea firms. Called Ikea Trading India, it is assessed under income tax law in this country.